International Research Journal of Management and Commerce Vol. 3, Issue 4, April 2016 IF- 3.861 ISSN: (2348-9766)
© Associated Asia Research Foundation (AARF)
Website: www.aarf.asia Email : editor@aarf.asia , editoraarf@gmail.com
A STUDY OF WORKING CAPITAL MANAGEMENT THROUGH
RATIO ANALYSIS WITH REFERENCE TO BHARAT HEAVY
ELECTRICALS LIMITED
Dr. Amit Kumar Nag*
Dr. Binoy Arickal**
*Assistant Professor, Department of Commerce, Bhopal School of Social Sciences. (BSSS).
**Assistant Professor, Department of Commerce, Bhopal School of Social Sciences. (BSSS).
ABSTRACT
Working capital is basically based on the current assets which are in the form of cash or which
can be easily converted in the form of cash also which helps in meeting day to day requirements
of the business enterprise. Inefficient management of working capital will lead to the downfall of
the organization and visa verse. The working capital is very essential for the business enterprise.
The requirement for having sufficient working capital arises because of the gap in the time
between production & realization of cash from sales. The requirement of working capital varies
from business enterprise to business enterprise and it also depends upon the nature and objective
of the business. Keeping this in view we have tried to evaluate the Working capital position of
BHEL for the years 2010-11 to 2014-15. In this study, we used current ratio, quick ratio,
absolute liquid ratio, working capital turnover ratio, etc for assessing the working capital
position of this organization.
Keywords: Working capital, Current Assets, Current liabilities & Short term liquidity.
INTRODUCTION
The capital is considered as the life of a business. As a human being requires food and air to live
organization needs money basically for two main purpose, firstly for the establishment of the
organization and secondly to carry out its day to day functioning. This capital can be grouped
under two main categories i.e. Fixed Capital and Working Capital.
Generally in the business there is an operating cycle involved in the sale & realization of cash.
This operating cycle is having a time gap in the purchase of raw materials & converting it into
finished goods, then the finished good is sold and there is also a time gap between selling the
finished goods and converting it in the form of cash. Some of the main purposes for having the
working capital is for the procurement of raw materials, to meet out the day to day expenses, to
pay the indirect expenses like administrative expenses, selling & distribution expenses etc., for
providing the credit facilities for credit sales, to have the stock of raw materials, work in
progress, stores & spares and finished goods, to pay the financial expenses like bank charges,
interest on capital, interest on loan, etc., to pay all the direct expenses which are involved
in production, etc. This paper, aims at assessing the working capital position of BHEL as well as
this paper enables us to examine the factors responsible for significant changes in working
capital during the study period from the year 2010-11 to 2014-15.
JUSTIFICATION OF THE TOPIC
Working capital analysis is of great practical importance as it covers a vast area. Keeping in view
the importance of working capital analysis, we have carried out the present research work titled
―A study of Working Capital Management through ratio analysis with reference to Bharat Heavy Electricals Limited‖ helps in assessing the short term solvency position as well as the growth of
this organization. This paper helps in finding out whether this company has sufficient funds for
the procurement of raw materials, whether the organization can easily meet out the day to day
expenses or other indirect expenses as well as the organization can provide the credit facilities
for credit sales, etc. This topic helps us in judging the short term liquidity position of this
organization as well as it helps in indicating the optimum utilization of the current
assets, working capital as well as the inventors of this organization.
REVIEW OF LITERATURE
Jain (1993) conducted a study among seven paper companies in India to analyze the
public sector undertaking during the study period was found to be highly erratic, while the same
in private sector undertakings registered continuous decrease. As far as the inventory was
concerned his study revealed that it was highly unplanned in public sector undertakings as
compared private sector undertakings. His study contributed much in terms of realizing the
importance of effective management of working capital.
Salmi and Martikainen (1994) “the research areas are reviewed are the functional form
of the financial ratios, distributional characteristics of financial ratios, classification of financial
ratios and the estimation of the internal rate of return from financial statements. It is observed
that it is typical of financial ratio analysis research that there are several unexpectedly distinct
lines with research tradition of their own. A common feature of all the areas of financial ratio
analysis seems to be that while significant regularities can be observed, they are not necessarily
be stable across the different ratios, industries and time periods. This leaves much space for the
development of a more robust theoretical basis and for further empirical research.‖
Reddy and Rao (1996) conducted a study on Hindustan Cable Ltd for the period
1989-90 to 1993-94. Having studied current ratio, quick ratio, working capital turnover ratio, etc they
concluded that the liquidity position of the company was unsatisfactory. However the study
revealed that there was a sign of improvement in the management of inventory and
ineffectiveness in the management of debtors. The study recommended for effective utilization
and control of current assets.
N.K. Sharma (1998) he specified in his book that the practical techniques used in
working capital management for measuring the liquidity of the business enterprise and analyzing
can be done through its sources of financing. According to him financial managers through
working capital management can decide what quantities of cash, other liquid assets, accounts
receivables and inventories should be maintained for the business enterprise. According to him
the management of working capital plays a very dominant role in maintaining the financial
health of the business enterprise during the normal course of business.
Eljelly, Abuzar M.A (2004) empirically examined the relationship between the
profitability and liquidity on a sample of joint stock companies which are operated in Saudi
position of the firms. At the industry level, the cash conversion cycle was more important than
current ratio as a measure of liquidity.
OBJECTIVES OF STUDY
The study fulfils the following objectives:
(i) To analyze the current assets, current liabilities and liquid assets of BHEL for working
capital analysis.
(ii) To identify the items responsible for changes in working capital position of BHEL.
HYPOTHESIS
In order to achieve these objectives, the following null hypothesis is framed for testing:
Ho: There is no significant difference in the Working capital position of BHEL during the period
of study.
LIMITATIONS
The following are the limitations of the study
(i) Any uneven trend before or beyond the set period will be the limitations of the study as we
have considered the data for the last five years.
(ii) This analysis is based on financial information only.
(iii) We have grouped and sub grouped some data for this study.
(iv) Sufficient data & literature was not available for this study.
(v) We have used the secondary data for this study.
Methodology
For the study, statistical data has been collected from the annual reports published by the
Bharat Heavy Electricals Limited. The statistical techniques like percentage, averages,
coefficient of correlation, coefficient of variation, T-test have also been applied. For proper
analysis and evaluation the individual items of profit and loss accounts and balance sheet have
also been regrouped.
For analyzing the Working capital analysis of BHEL from the year 2010-11 to 2014-15, liquidity
ratios has been used. In order to measure the working capital position we have used the current
ratio, quick ratio, as well as the absolute liquid ratio and working capital turnover ratio.
1. Current Ratio
The Current ratio measures the firm‘s short term solvency and it indicates the availability of
current assets in rupees for every one rupee of current liability. A greater ratio indicates that the
firm has more current assets than current claims & the ideal ratio is considered as 2:1. On the
other hand if this ratio is low then it represents the liquidity position of the firm is not good.
Current Ratio = Current Assets
[image:5.612.115.498.311.625.2]Current Liabilities Table No. 1: Statement Showing Current Ratio (Rs. In Crores)
Year Current Assets Current Liabilities Current Ratio
2010 - 11 43588 25257 1.725779
2011-12 49090 29155 1.683759
2012-13 51410 28197 1.823244
2013-14 52395 25996 2.015502
2014-15 49040 22817 2.149275
Mean 49104.60 26284.40 1.88
SD 3412.44 2503.00 0.20
CV 6.95 9.52 10.52
Growth % 12.51 -9.66 24.54
Average
Annual
Growth
2.50 -1.93 4.91
Source: Compiled from Annual report of the BHEL (From 2011-2015).
As per table no.1, the working capital position of this organization seems to be
improving. Initially it was at 1.72:1 and it got increased to 1.82:1 by 2012-13. There was a
further increase as it was at 2.14:1 by 2014-15. The mean was at 1.88: 1 where as the coefficient
of variance was at 10.52%. The growth reflected at 24.54% and the average growth was at
4.91%.
2. Liquid Ratio
The liquidity ratio or Quick ratio refers to the ability of the firm to pay its short term obligation
as and when they become due. The liquid assets should not include stock & prepaid expenses
which cannot be converted into cash within a short period. The ideal ratio is considered as 1:1. It
measures the firm‘s capacity to pay off current obligations immediately and it is a more rigorous
test of liquidity than the current ratio. It is used as a complementary ratio to the current ratio.
Liquid Ratio =Current LiabilitiesLiquid Assets
Liquid assets = Current assets – (Stock + Prepaid expense)
Table No. 2: Statement Showing Quick Ratio (Rs. In Crores)
Year Liquid Assets Current Liabilities Quick Ratio
2010 - 11 32685 25257 1.294097
2011-12 35565 29155 1.219859
2012-13 39541 28197 1.402312
2013-14 42587 25996 1.638214
2014-15 38929 22817 1.70614
Mean 37861.40 26284.40 1.45
SD 3819.71 2503.00 0.21
CV 10.09 9.52 14.63
Growth % 19.10 -9.66 31.84
Average Annual
Source: Compiled from Annual report of the BHEL (From 2011-2015).
Interpretation
As per the above table no.2, the quick ratio of this organization seems to be improving.
Initially it was at 1. 29:1 and it got increased to 1.40:1 by 2012-13. There was a further increase
as it was at 1.70:1 by 2014-15.the quick ratio was more than the ideal ratio of 1:1 throughout the
study period. The mean was at 1.45: 1where as the coefficient of variance was at 14.63%. The
growth reflected at 31.84% and the average growth was at 6.37%.
3. Absolute Liquid Ratio
The absolute liquid ratio is more rigorous than current ratio and quick ratio. This ratio is
calculated to find out the firms capacity to pay current obligations very immediately. The
absolute liquid ratio is calculated by dividing absolute liquid asset by liquid liabilities. The
absolute liquid asset includes cash in hand, cash at bank and marketable securities. The
acceptable norm for this ratio is 0.5:1.
Absolute Liquid Ratio =Absolute Liquid Assets Current Liabilities
[image:7.612.84.530.393.665.2]Absolute liquid assets = Cash in hand+ Bank balance+ Marketable securities
Table No. 3: Statement Showing Absolute Liquid Ratio (Rs. In Crores)
Year Absolute Liquid
Assets Current Liabilities Absolute Liquid Ratio
2010 - 11 9706 25257 0.38429
2011-12 6734 29155 0.230972
2012-13 7852 28197 0.278469
2013-14 12019 25996 0.46234
2014-15 9948 22817 0.435991
Mean 9251.80 26284.40 0.36
SD 2040.05 2503.00 0.10
CV 22.05 9.52 27.94
Average
Annual
Growth
0.50 -1.93 2.69
Source: Compiled from Annual report of the BHEL (From 2011-2015).
Interpretation
As per the above table no. 3 the absolute liquid position of this organization seems to be
increasing. Initially it was at0.38:1 and it got increased to0.46:1 by 2013-14. However there was
a slight decrease as it was at 0.43:1 by 2014-15. The mean was at 0.36: 1 where as the coefficient
of variance was at 27.94%. The growth reflected at 13.54% and the average growth was at
2.69%.
4 Working Capital Turnover Ratio
The Working capital turnover ratio measures the utilization of working capital & the number of
times the working capital is rotated in the course of a year. A greater ratio indicates that the
organization has utilized the working capital efficiently & on the other hand, if this ratio is low,
then it represents organization has not utilized the working capital efficiently.
Working capital turnover Ratio =Cost of goods sold
[image:8.612.80.526.51.125.2]working capital
Table No. 4: Statement Showing Working capital turnover Ratio (Rs. In Crores)
Year Cost of goods sold Working
Capital
Working Capital Turnover
Ratio
2010 - 11 23366 18331 1.274671
2011-12 29132 19935 1.461349
2012-13 28171 23213 1.213587
2013-14 22465 26399 0.850979
2014-15 18270 26223 0.696717
Mean 24280.80 22820.20 1.10
SD 4442.17 3640.69 0.32
Growth % -21.81 43.05 -45.34
Average
Annual
Growth
-4.36 8.61 -9.07
Source: Compiled from Annual report of the BHEL (From 2011-2015).
As per table no.4, the working capital turnover position of this organization seems to be
declining during the study period. Initially it was at 1.27 times and it got increased to 1.21 times
by 2012-13. There was a further decrease as it was at 0.69 times by 2014-15. The mean was at
1.10 times where as the co-efficient of variance was at 28.71%. The growth reflected at -45.34 %
and the average growth was at -9.07%.
TESTING OF HYPOTHESIS
In this study the hypothesis has been analyzed by t-test as the significance of data can be
analyzed by means of statistical tools. Hence correlation & t- test have been applied in this study.
Ho: There is no significant difference in the Working capital position of BHEL during the period
[image:9.612.86.530.51.149.2]of study.
Table No. 5. Paired Samples Statistics
Mean N Std. Deviation Std. Error Mean
Pair 1
Current
Assets 49104.60 5 3412.44 1526.09
Current
[image:9.612.72.541.426.743.2]Liabilities 26284.40 5 2502.99 1119.37
Table No. 6. Paired Samples Correlations
N Correlation Sig.
Pair 1 Current Assets & Current Liabilities 5 .273 .657
Table No. 7. Paired Samples Test
(2-Mean
Std.
Deviatio
n
Std.
Error
Mean
95% Confidence
Interval of the
Difference
tailed)
Lower Upper
Pair 1 Current Assets -
Current Liabilities 22820.20 3640.69 1628.17 18299.69 27340.71 14.02 4 .000
Interpretation
t = 14.02, t 0.05 = 2.776
t > t 0.05
When the degree of freedom is 4 & the level of significance is 5%, the critical value of t 0.05 is
2.776. Since the calculated value of t is 14.02 which is more than the critical value we conclude
that the null hypothesis is rejected there is significant difference in the Working capital position
of BHEL during the period of study.
SUGGESTIONS
Steps should be taken by the company to maintain the current ratio at an ideal standard of
2:1 as the working capital position was satisfactory from 2012 to 2015.
For the betterment of short term solvency the company should try to reduce its current
liabilities.
The company should try to improve their cash position by taking short term loans or
through bank overdraft for making the payments of day to day expenses and other current
obligations.
The company should try to effectively utilize its stock hence the corporation should have
better policies to reduce its stock.
The working capital of the company was not properly utilized as the working capital
turnover ratio was low during the study period, hence corporation should try to utilize its
working capital efficiently by reducing the cost of goods sold.
The company should improve the composition of the current assets like inventories,
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